The global markets are poised at a key inflection point. The US dollar index is near its crucial resistance level of 93 and the Euro is hovering just above the important trend deciding support level of 1.1750. On the equities front, the Dow Jones Industrial Average has closed the week in the 35,000-35,100 resistance zone. Can the US Federal Reserve’s monetary policy meeting outcome on Wednesday provide a possible trigger for the dollar index to break above 93? We will have to wait and watch.
The coming week is packed with important data releases from the US on all days. The most important would be the outcome of the US Federal Reserve meeting on Wednesday. While the central bank is likely to leave the rates unchanged, any hint of when it could begin the stimulus tapering will be closely watched by the market. Any such comment on the taper front could cause volatility in the market and trigger a sell-off in risky assets such as the equities and strengthen the dollar. Apart from the Fed meeting, US new home sales, Consumer Confidence, GDP and the Personal Consumption Expenditure (PCE) are the other major data releases due this week and can influence the dollar index movement.
Dollar Index can break 93?
The US dollar index (92.91) has broken above the crucial level of 93 last week but failed to sustain. However, it is getting intermediate support at 92.5. This keeps the chances high of the index breaking above 93 and sees an extended rise to 94-94.50 in the near term. Thereafter, we can expect the dollar index to reverse lower again. The 94-94.50 band is a strong resistance which is likely to cap the upside and trigger a reversal going forward. The price action in the 94-94.50 region will need a close watch.
ECB meeting – A non-event
The outcome of the European Central Bank’s meeting last week turned out to be a non-event. The central bank left the interest rates and the quantum of the stimulus programmes unchanged. As such, the refinancing and the marginal lending facility rate will remain unchanged at 0 per cent and 0.25 per cent respectively. The quantum under the Asset Purchase Programme (APP) will continue at 20 billion euros per month as long as needed. Also, the purchase under the Pandemic Emergency Purchase Programme (PEPP) will be done for a total of 1,850 billion euros at least till end of March next year, or until the central bank feels that the coronavirus crisis has ended.
The ECB’s policy meeting kept the euro (1.1771) lower and stable with no impact. The currency has managed to hold above the crucial support level of 1.1750 all through last week. However, if the dollar index breaks above 93 then the euro can break below 1.1750 and fall to 1.17 and even 1.16 in the coming days.
The support at 75 mentioned last week held very well as expected. The Indian Rupee (74.4050) made a low of 74.96 on Tuesday and recovered thereafter. There is room for the rupee to strengthen further towards 74.20 this week. 74.20 is an important resistance. The rupee will have to breach 74.20 in order to strengthen further towards 74 and 73.80 thereafter. Inability to break above 74.20 can see the rupee weakening towards 74.50-74.60 again. The price action at 74.20 will need a close watch.
Dow Jones at resistance
The Dow Jones Industrial Average (35,061.55) tumbled over 700 points on Monday and made a low of 33,741.76. But thereafter, it clawed back, recovering all the loss and also closed the week on a strong note. The index is now poised in the crucial resistance zone of 35,000-35,100. The bias is bullish to see a break above 35,100 and rise to 36,000. However, if the Dow fails to breach 35,100 and falls back, it can remain in the broad range of 33,000-35,100 range for some more time. The price action near 35,100 will need a close watch.
The writer is a Chief Research Analyst at Kshitij Consultancy Services